Calculating Business Value - Scrum Inc

1 Calculating Business Value Unlocking Your Value Delivery Potential Agile 2014 Orlando July 13, 2014. Presenter: Alex Brown 2014 Scrum Inc. 2011 Scrum Inc. : Who We Are Scrum Inc. is the Agile leadership company of Dr. Jeff Sutherland, co-creator of Scrum . We are based in Cambridge, MA. We maintain the Scrum methodology by: Capturing and codifying evolving best practices, Conducting original research on organizational behavior Adapting the methodology to an ever-expanding set of industries, processes and Business challenges We also help companies achieve the full benefits of Scrum through our full suite of support services: Training ( Scrum Master, Product Owner, Agile Leadership, webinars, etc.). Consulting (linking Scrum and Business strategy, customizing Scrum ). Coaching (hands-on support to Scrum teams). Publishing and new content development We run our services company using Scrum as the primary management framework, making us a living laboratory on the cutting edge of Enterprise 2014 Scrum Inc.

2 Scrum . Find out more at Agenda What do we mean by Business Value Sources of Business Value Different ways to measure Business Value How Scrum Inc. addresses Business Value Tiered work streams Our cadence and approach NPV per point as a unifying metric Deep dive into NPV/point analysis Examples for different Epic types 2014 Scrum Inc. 2. What Is Business Value ? Business Value results from the What you What you can intersection of three dimensions implement can sell 1. What you can implement successfully and sustainably 2. What your customers want and will buy What you are (even if they don't know it yet) passionate 3. What your team is excited about creating about Should be an explicit consideration of the organization Estimate at Epic rather than User Story level What is the source of Value that will be created? How much effort will it take to create that Value ?

3 Prioritize Epics by ROI (most Value with the least effort). Coordinate with your Finance Department 2014 Scrum Inc. They already have a view of production function and ROI metrics Engage them as an ally they will love that you are speaking with them Sources of Business Value Will this feature allow us to: Market Sell more units? Value Charge a higher price? Reduce the cost of providing the product/service? How will completing this story allow us to: Risk Develop or refine hypotheses about the market? Reduction Prove technical assumptions? Will completing this story: Enable our team to do something we couldn't Capability before? Building Reduce or eliminate the need for low- Value activity? 2014 Scrum Inc. Not All Features Are Created Equal! 80% of Value typically resides in 20% of features 65% of features provide li8le to no Value , are rarely used and/or aren't actually desired by the customer The rest are OK, but not as important 2014 Scrum Inc.

4 How can you tell ahead of Eme which features add Value and which don't? Prioritizing Features Effectively Can Deliver Radically More Business Value 200. 180. 160. 140. Value (%). 120. 100. 80. 60. 40. 20. 10 20 30 40 50 60 70 80 90 100. Time, Cost, Features (%). 2014 Scrum Inc. Methods for Determining Value Start at the top of a list of stories Compare Value of stories one at a time Bubble Sort Move the lower Value story down one place in list Faster Repeat until all stories have been compared Pick a low Value item and assign it 3 points Planning Poker .. Use estimation cards to independently estimate a story Show estimates, discuss highs and lows, estimate again When everyone is within three cards, average the estimates Compare cost of feature creation with expected Break-even analysis incremental revenue of feature How many incremental units would we need to sell to equal the development cost?

5 Estimate in a lightweight way the opportunity cost of NOT. Cost of Delay completing a feature Often divided by feature size to get a proxy for ROI. = [Total expected revenue from new feature]/. Return On Investment total cost to develop feature] 1. Expressed as a percent More Detailed Over a reasonable planning horizon, what are the revenues and expenses associated for a feature in each Cash Flow Analysis month? What is the net effect on cash flow over that horizon? Building on the cash flow analysis, what is the effect Net Present Value 2014 Scrum Inc. of including the time Value of money in the calculation? ( a dollar today is worth more than a dollar tomorrow). Four Pillars to Scrum Inc.'s Business Value Process Jan New knowledge creaEon E ciency improvements Online content Webinars Coaching Publishing ConsulEng CSM class CSPO class Mgmt. workshops IT, communicaEons, and web Invoicing Expense processing proposal response 1.

6 Tiering Ac6vity by Category 2. Regular Quarterly Cadence Cash Flow ($). NPV/point Time Points 2014 Scrum Inc. 3. NPV/point for each Epic 4. Priori6za6on of Epics Scrum Inc. Activities Tiered into Parallel Workflows New Growth and knowledge creaEon innovaEon acEviEes E ciency improvements Online content Micro classes Value and revenue creaEon acEviEes Coaching Publishing ConsulEng CSM class CSPO class Mgmt. workshops Keeping the IT, communicaEons, and web Lights On (KLO) Invoicing 2014 Scrum Inc. Expense processing proposal response Business Value Vision Updated on a Regular Cadence Jan Mul6ple parallel planning, review, and retrospec6ve cadences Yearly Strategic goals Financial esEmates Quarterly Epic de niEon/prioriEzaEon Release planning Financial Forecasts and goals Monthly Actual nancial performance Epic progress check in Each Sprint User story planning Backlog re nement Sprint goals 2014 Scrum Inc.

7 Business Value Calculation Anchored to the Production Function . ProducEon FuncEon describes the mechanics by which organizaEon accomplishes its mission. NPV/point calculaEons should link to variables in the ProducEon FuncEon Agreeing on the ProducEon funcEon helps align the product vision Some Examples: 1 [Pro t] = [Units Sold] x ([Price/Unit] [Cost/Unit]) [Fixed Cost]. 2 [Pro t] = [Monthly Users] x [Member Fee] [Fixed Cost]. 3 [Impact] = [People Impacted] x [Magnitude of Impact]. 2014 Scrum Inc. Cash Flow Profile for a Typical Epic CumulaEve Cash Flow ($). Investment period Return period Time Point of Maximum Positive Return Required on Investment Investment Cash flow break even point 2014 Scrum Inc. Calculating Net Present Value Where N Ct Ct is the net cash flow in time period t (1+r). t=0. t r is the discount rate t is the time period N is the total number of time periods considered Illustrative Example: Cash Flow ($) C0 = -$50; C4 = -$30; C6 = $45; C10 = $100.

8 R is 5%. 100. $100 = $ (1+.05)10. $61. $45. NPV = $34. $20. $25 5 10 15. t0 = $50. $30. Today Time (t). 2014 Scrum Inc. NPV/Point Drives Better Decision Making One metric to encapsulate return on investment 1. Calculate Epic NPV. 2. Can also include intangible benefits Use Planning Poker to estimate Business Value relative to reference activity with known cash flows 3. Estimate story points to complete Epic 4. Divide total NPV by estimate of points Answers: How can we get most return with least effort? Focuses team on optimizing returns Eliminates most internal power politics Encourage teams to think in Business case terms Highlights key assumptions and variables to confirm Supports after-action review to improve accuracy 2014 Scrum Inc. Improves ability to forecast financial results Prioritize Candidate Epics by NPV/Point Minimum level set by current Rev/point run rate NPV/point E1.

9 E2. E3. E4. E5 NPV/Point oor E6 (based on current E7 rev/point run rate). E8. Points Available quarterly team capacity for Epics 2014 Scrum Inc. (based on yesterday's weather). Scrum Inc. Case Study: Setup Install videoconference Publish a book system New revenue opportunity Performance improvement $400,000 advance, paid at key No additional revenues milestones 25% at contract signing $5,000 in up-front expense 50% at draft delivery (+12 mo.). 25% at publication (+9 mo.). Team estimates closer team Estimate $5,000 in travel and integration will increase velocity by research expenses approx. 2%. Current velocity is 200pts/sprint Estimate intangible benefit of brand Current revenue run rate is $250/pt building at 2x reference story (reference worth $30,000) Estimate 25 points of effort to Estimate 1,500 points of effort to research, purchase and install research, write and edit Assume system will need replacement in 3 years 2014 Scrum Inc.

10 Which project should we do rst? Should we do them both? Case Study: Calculate NPV/Point Publish a book Install videoconference system $ $. NPV = C13 = $200K NPV =. $358K $57K C2 36 = $2,000. C1 = $100K C22 = $100K. + +. C1 = $5,000. $60K of C2 13 = $500 $0. r = 10% r = 10%. intangibles intangibles . Research (300pts) Research (10pts). 1,500 Writing (100pts/chapter x10) 25 Purchase (5pts). story points Editing (200pts) story points Install (10pts). $279/point VS. $2,279/point 2014 Scrum Inc. Exercise: Scrum Caf . You and your team recently opened a local restaurant. It has: A small kitchen with sink, fridge and range-top 5 caf -style tables You have been serving soup and sandwiches at lunch, have attracted a small but loyal following, and are just breaking even with weekly revenue of $5,000. photo credit: *Light Painting* via photopin cc Since you use Scrum to run your restaurant, you know that team velocity is 100 points for each week-long sprint You have found a bank that will give you a loan at an interest rate of 7%, but they will want a compelling argument for how you plan to use the money 2014 Scrum Inc.